Disintermediation in Esoteric Assets (Part 1)

“Crowdfunding” has been a hot word for the last couple of years. It started in 2006 with Prosper Marketplace, quickly followed by Lending Club in 2007, for peer to peer lending (a bit more like peer-to-institutional lending these days), followed by sites like Indigogo and Kickstarter for grassroots funding for products and ideas. Niche sites are coming online for things real estate loans (Fundrise), and Student loans (Student Loan). Now sites are popping up for “crowdfunding for equity”, essentially making VC and Seed investing accessible to everyday people (retail).

Congress passed the JOBS Act, in an attempt to make investing in startups easier; it reduced regulatory reporting requirements, upped the amount of money companies could raise via equity without registering with the SEC, and opened up investing to less sophisticated investors.

Everyone is getting in on it!

Most of my time in finance is spent in the alternative and esoteric fixed income asset classes – life insurance policies, aircraft and aircraft part lease backs – all structured as securitizations or loans with various terms, risk factors, etc. These products come with interest rates anywhere from 10-20% - and that’s in our current zero interest rate environment, and they’ve been around for decades. They are much smaller markets than consumer lending, so they haven’t been a target so far for the disintermediation technology companies are bringing to the table.

All of these companies and ideas have a similar idea underlying them – take an asset class that traditionally has been locked away behind “good old boy’s networks” (mostly the VC’s of the valley or the largest banks) and make it easier for the little guy to invest in it.

Consumer loans have traditionally been underwritten by banks, who will hold the loans on their balance sheet until they accumulate enough, and then they securitize it (bundle it up into a “single asset”), and sell it off to an investor. Even though there is typically a servicing fee of 1% (or so), the origination fee, usually around 5%, is where the cash cow is. If banks can take $100M and originate loans, giving them 5%, and then turn around and sell that bundle of loans for $100M, they can then continue to originate making that 5%, month after month.

It’s going to be interesting to watch what other asset classes get this technology makeover.

There are a number of infrastructure technology providers out there that will be required for these companies to get off the ground successfully, in the next couple of posts in this series I’ll dive into the various aspects of what it takes to get one of these companies off the ground – what technologies and services one would require.